Thursday, November 10, 2016

2008 B Macro FRQ #2

2008 B Macro FRQ #1

(A) Will each of the following groups benefit from the decrease in the tariff rate?

(i) Mexican consumers

If the Mexican government reduces the tariffs (tax) on cars being imported from other countries then importers will be able to sell those cars for less. This means Mexicans will be able to buy cars at a cheaper price and be able to spend the surplus savings on other goods like, education, healthcare, entertainment, food, clothing. Yes, I would say that this is a benefit.

(ii) Mexican automobile manufacturers. Explain.

No Mexican automobile manufacturers would like tariffs to be higher not lower. If tariffs were higher then the Mexican manufacturers would be able to raise the prices of their domestically produced cars. Mexican automobile manufacturers would not benefit. 

If tariffs are reduced then importers can charge less for each car. Consumers will be able to buy cheaper cars. Domestic producers of cars will have to lower their prices to compete with the imports.

(B) How would the decrease in the tariffs rate affect each of the following in Mexico?

(i) Current Account Balance. Explain.

We must first know what the Current account is.

If the current account balance is (imports & exports) goods and services.
If Mexico lowers its tariffs on automobiles imported then the price of imported automobiles will fall and more automobiles will be imported. Therefore their will be a current account deficit as imports will be increasing relative to exports..

(ii) Capital (financial) account balance.

If the current account is in a deficit, and therefore the capital account must be in a surplus. 

Think of it like this - If you buy food from the grocery store you have imported goods into your household and therefore your current account is in a deficit. When you paid for the food you bought at the store that money is counted in the financial (capital account). The grocery store will take this cash and spend it at your advertising firm by buying your services.

When Americans buy cars from Germany our current account goes into a deficit but we paid for the cars with cash, and this cash will be used to buy property and goods from America. 

(C) Given the change in Mexico's current account in part (B)(i), what will happen to the aggregate demand in Mexico.

If Imports increase then net exports must decrease and therefore AD will decrease as Net exports is a component of AD.

2008 B Micro FRQ #3

2008 B Micro FRQ #3

(A) After which worker do diminishing marginal returns begin?

Make a chart.

What is Diminishing Marginal Returns?

From the Resource Costs (Labor) Cheat Sheet here.

The MRP, marginal revenue product increases to $20 with the hiring of the 1st worker. The second worker brings in $32. The third worker brings in $20 and every worker hired after the second brings in less revenue. The returns fall after hiring the second worker.

(B) Calculate the Marginal Physical Product of the 5th worker.

What is the marginal physical product?

For the AP exam, where the input of labor (number of workers hired) increases by one at a time you should use MP marginal product and Marginal Physical Product interchangeably. MP & MPP are different when hiring more than one labourer at a time.

The marginal product (product produced by the 5th worker) is 5 units of the good.
Understand that the change in production from the 4th worker to the hiring of the 5th worker created an additional 5 hats.
Again, the question is simply asking how many hats are produced by the 5th worker.

(C) Calculate the marginal revenue product of the 3rd worker.

Chart - 
3rd worker - MP(10) X P(2) = $20
The 3rd worker brings in $20 and costs us $15

(D) How many workers will be hired to maximise profit?

Profit Max for hiring is where MRP  = MRC
Or as close as possible without losing money.

**hiring the 4th worker makes us $1 of profit.
**hiring the 5th worker would cost us $5, a loss

(E) If GW has fixed costs equal to $20, what will be the company's show-run profit from hiring 
two workers?

Remember don't you, that MC (wage) is a variable cost and VC+FC = TC

So, if the wage of each worker is $15 then the wage for the two workers is $30. This is the VC. The fixed cost is $20. ((This is not $20 per worker so don't double it.)) 

VC ($30) + FC ($20) = TC ($50)

Remember that Profit = TR - TC

The MRP or Total Revenue earned from hiring two workers is ($20 + $32) = $52

So, TR($52) - TC($50) = Profit of $2

(F) If the price of hats increases, what will happen to the number of workers hired in the short-run? Explain.

MRP (additional revenue per additional worker hired) The formula for MRP is MP x P = MRP.

So if either the MP (productivity) or the P (price of the good) increases then the MRP will increase.

If the MRP increases then more workers will be hired as now it will be more profitable to hire an additional worker.

I had answered this problem in an earlier post, here.